Ferguson’s energy gamble may be all folly

When federal Resources Minister
Martin Ferguson
first announced he would produce an energy white paper, it looked like a blatant attempt to distract attention from a policy mess.

It was May last year at the height of the carbon tax battle when serious industry figures were warning of rolling blackouts as coal-fired power stations shut down. It was feared that ever increasing electricity prices would kill industries and send punters to the poorhouse. Also, the Minerals Resource Rent Tax had just been passed amid predictions that it would destroy the country’s coal industry.

Ferguson was clearly hoping the white paper could somehow convincingly argue he had a plan to still all of these fears. It is not clear whether the final plan has succeeded but Ferguson was at least confident enough to put his head above the parapet and release the long-delayed document last week.

Certainly, he has been encouraged by the fact that the carbon tax has so far not had a major effect on the economy and has been accompanied by a small rise in the government’s dismal polling.

In a mark of his confidence, Ferguson made a pitch to work with state premiers and even the opposition on some of the issues. “Where bipartisan support can be achieved, I am confident we can achieve this ambitious agenda," he said at the paper’s launch on Thursday.

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The paper tries to tie together some very disparate threads with the theme that Australia should look to “market-based" solutions to its energy problems. That phrase conveniently puts a positive spin on some of the government’s more controversial energy policies, especially the carbon tax which is, in theory, a market-based way to cut emissions.

The big picture is that, despite all the changes in the world, Ferguson expects Australia to remain a major energy exporter while, at the same time, keeping its domestic energy prices fairly low. By 2035, we are expected to export four times more energy than we consume, compared with only twice as much now. This assumes that coal exports will continue to grow slowly, notwithstanding signs of a slowdown in China and the global move to lower carbon emissions.

The energy export story will increasingly be about gas, which has been a big lucky break for the government in the past 18 months. Estimates of coal seam gas and liquefied natural gas exports have surged.

In its statement on monetary policy on Friday, the Reserve Bank of Australia again underlined that while coal investment was slowing fast, LNG and coal seam gas projects are going ahead. By 2035, gas will rise from a few per cent of energy exports to more than 20 per cent.

The white paper is fighting two key policy battles, first against the Greens and farmers who want to slow the gas projects in sensitive areas in NSW, Queensland and off the West Australian coast, and second against the protectionists who want to keep gas prices artificially low domestically by restricting exports.

Gas prices are climbing sharply, partly because of the tight gas supply on the east cost.

Ferguson is hoping to build a free-market pro-development and pro-foreign investment consensus that crosses party lines, saying: “Interventions such as reservation policies to force price or supply outcomes are more likely to impede than promote supply."

The domestic side of the energy mix is even more controversial than exports. The prediction is that total domestic energy consumption will barely rise in the next two decades as Australians learn to consume power more efficiently. It seems like a big call.

At the same time, the sources of domestic energy will shift from coal and imported oil to gas and renewables such as wind and roof-top solar. In fact, since power demand is growing slowly, the transition will take a little longer than expected because there is less demand to build new renewable power to supplement existing supplies.

Still, the forecast is that, in 2035, only a third of Australia’s electric power will come from coal-fired generators compared with almost 60 per cent now. The share of the power supply from renewables will jump from a 10th to 40 per cent with 13 per cent coming from roof-top solar panels.

This is probably the Achilles heel of Ferguson’s pledge to pursue market-based policies. The renewables industry is currently distorted by thousands of conflicting and inefficient subsidy programs. The most glaring example is that the current system gives much bigger subsidies to solar panels on roof-tops than to large and more efficient wind farms.

It will get worse. The level of support for the big schemes is capped at 20 per cent of total output but roof-top solar is being allowed to grow exponentially, displacing wind and large-scale solar. Consumers in NSW are already paying $167 a year for these green subsidies, over and above the carbon tax.

The Productivity Commission has questioned the need for supporting renewables especially roof-top solar now that the carbon tax is sending a long-term price signal to investors.

But while the white paper maintains that the government is committed to “efficient deployment based on market signals," Ferguson himself has admitted the government has other agendas.

“While rightly focused on cost and efficiency outcomes, government and industry must also look to move to cleaner forms of energy," he said.

The ace in Ferguson’s deck is probably the paper’s push to complete the transition to a competitive national power market that was launched almost 20 years ago by the Hilmer review.

Ferguson can argue that the problem of rising electricity prices is not just the result of green schemes and the carbon tax but also the outcome of the mass of state-government ownership and regulation that still fragments the market. In most states, the costs to consumers of operating power networks, mostly state-government owned, have risen four times faster than inflation.

Ferguson has launched a battle for the privatisation of the state’s remaining power assets and the deregulation of state rules that limit retail price competition.

He has argued that billions have been wasted gold-plating these state-owned monopoly assets at consumers’ expense.

“I believe it is time to minimise future pressures by ensuring markets, regulatory frameworks and their institutions operate in the long-term interests of consumers," he said.

State governments will probably have to sign up to some of this agenda. Otherwise it will appear that they are fighting for the profits, dividends and taxes that flow from their network and generation companies.

NSW Energy Minister
Chris Hartcher
said he had actually thought of all this stuff first and Ferguson was just borrowing his ideas.

“We have long called for an overhaul to the rules which regulate investment in transmission and distribution networks, and finally the federal government is listening," Mr Hartcher said.

There is a meeting next month of a body called the Standing Council of Energy and Resources where Ferguson will probably win approval from state counterparts to giving the federal regulator tighter control over prices and profits at state government energy networks. That will allow the federal government to claim it is making progress in cutting power costs.

But the deregulation and privatisation agenda along with the creation of a truly national power market is a topic that will take a lot longer to solve. Queensland’s Liberal National Party is ideologically opposed to selling its networks and ending price controls, which currently involve a huge subsidy to the bush.

NSW is strapped for cash and is clinging to the dividend and tax flows from its choice power assets. How can Ferguson change that?